Global Market Turmoil: The Perfect Storm of Yen, Tech, and Jobs

The storm that hit global markets last Friday has continued into Monday. The sell-off that began in Asia has spread to the U.S. markets on Monday, causing anxiety among investors worldwide. Japan's Nikkei index fell sharply, and the U.S. Dow Jones and Nasdaq indices also showed significant declines. Many analyses are circulating about the background of this sudden market chaos. Gathering these analyses, it appears that three main factors are at the center of this market turmoil.

Cause 1: Sudden Strengthening of the Japanese Yen

Due to the recent increase in Japan's benchmark interest rate, the yen has strengthened, rising 12% against the dollar in the past few weeks. The strong yen has caused the following shocks:

• Concerns about declining performance of Japanese export companies led to a fall in the Japanese stock market (especially as large-scale yen-borrowed stock purchases by foreign investors were liquidated, causing the Nikkei index to plummet)

• Unwinding of yen carry trades (yen borrowing & yen short): Large-scale yen purchases were made to repay yen borrowings and respond to yen short margin calls, leading to a vicious circle of further yen strengthening

• It's particularly noteworthy that Japan is the world's largest creditor nation(see graph below). Japanese investors held $10.6 trillion in overseas assets as of the end of last year. If the yen continues to strengthen, pressure to dispose of these overseas assets could lead to a decline in global asset prices and further yen strengthening

(Source: Wall Street Journal)

How much further the yen will rise remains to be seen, and this market turmoil is likely to continue until the liquidation of these speculative bets on the yen is completed.

Cause 2: Concerns about Overvaluation of U.S. Big Tech Stocks

One of the main reasons for the U.S. stock market crash has been the persistent concern about the overvaluation of Big Tech stocks. In addition, several recent news items have amplified these concerns and shocked investor sentiment:

• Intel's announcement of large-scale layoffs (15,000 employees): Interpreted as a signal of restructuring in the tech industry

• Warren Buffett's disposal of half of his Apple stock holdings: Interpreted as a change in stance on tech stocks by the market's representative value investor

• Delay in NVIDIA's next-generation GPU production: Concerns that the pace of technological innovation may be slower than expected
  

These factors have combined to lower investors' confidence in tech stocks overall, leading to the U.S. stock market crash.

Cause 3: U.S. Employment Indicators and Economic Outlook

Against this backdrop, the U.S. employment figures released last Friday were weaker than expected, raising concerns about a recession and rapidly changing market sentiment. However, the following points should be considered:

• The number of new jobs in July was low at 114,000, but this could be due to temporary factors (weather - Hurricane Beryl, temporary layoffs) (For reference, the number of new jobs in April was 108,000, lower than this announcement, but nothing happened then)

• While the unemployment rate has risen, the number of "permanent" unemployed has not changed significantly for over a year, and the recent increase in unemployment is mainly due to new entrants and re-entrants to the labor market

• Q2 GDP growth was 2.8%, and Q3 projections are around 2.5%, far from a recession

• Various high-frequency economic indicators (air passenger numbers, restaurant reservations, bank loans, etc.) still show a robust economic situation

• S&P 500 companies' earnings are generally exceeding expectations, with earnings growth rates at their highest since 2021

• While some consumer goods companies (McDonald's, Amazon, Pepsi, etc.) have shown weak performance, others like Chipotle and Coca-Cola continue to show strength

• Royal Caribbean and Carnival report strong cruise demand

Other Points to Note

The Financial Times mentions the possibility that such volatility has occurred due to reduced market liquidity as senior investors and traders have gone on vacation during the August holiday season.

In conclusion, the global economy is currently facing increased uncertainty centered on two major variables: the strengthening yen and concerns about overvaluation of U.S. Big Tech stocks. Added to this is the news of weak U.S. employment figures, increasing concerns about a recession. However, in a situation where volatility has suddenly increased, investors need to understand economic trends from a mid to long-term perspective and establish response strategies rather than overreacting to short-term fluctuations.